The Terrific 28

Reprinted by Permission of Morningstar Morningstar FundInvestor May 2019

The Terrific 28

Every year, I write about the Fantastic 40—although Why the List Is Shrinking the number varies slightly each time. The idea is I’ve had lists top 50, yet this year only 28 made the cut. to focus on the most important factors and let them I looked at many of the past Fantastic Funds lists do the weeding for me. The goal is a short list of to see why fewer of them passed the screens. Most outstanding funds accessible to individual investors. of the time, it was the fee test that rejected them. Russel Kinnel, Director of This isn’t a list for huge pension funds. Fund expense ratios have come down as passive funds Manager Research and Editor race to zero and active funds try to stay competitive. You can be awfully picky when you have 8,000 funds Making things more challenging, though, are the rise to choose from. The criteria have largely been of no- or low-fee funds that are used in sales channels the same, with some minor tweaks over the years. where fees are collected outside the mutual fund. In these cases, the fund fees are artificially low, and Here are the tests I used this time: many have 10 basis points or lower expense ratios— 1 | Expense ratio in the cheapest quintile. only no one can actually buy them at those prices. 2 | Manager investment of more than $1 million in the fund. A second factor is that the risk test has bounced 3 | Morningstar Risk rating below the High level. some perennial fantastic funds such as Dodge & Cox 4 | Morningstar Analyst Rating of Bronze or higher. Balanced DODBX, Dodge & Cox Global Stock 5 | Parent rating of Positive. DODWX, Dodge & Cox International Stock DODFX, 6 | Returns above the fund’s benchmark over the Primecap Odyssey Aggressive Growth POAGX, manager’s tenure for a minimum of five years. and Primecap Odyssey Growth POGRX. It’s not sur- In the case of allocation funds, I used category prising to see a fund like Primecap Odyssey Aggre- averages instead because benchmarks are ssive Growth rate a High for Morningstar Risk, but the often pure equity or bond and therefore not a others are more measured, so it is surprising to see good test. them also rate High for risk this year, meaning they 7 | Must be a share class accessible to are in the 10% most volatile funds of their category. individual investors. 8 | No funds of funds. Let’s review the 28. I’ve grouped them by fund family. In the table, we have a "C" next to the fund name if You may recall that I detailed past performance of the fund is closed to new investors. prior lists in the March issue of FundInvestor. American Funds In all six lists over the years, at least two thirds or Capital Group funds are always big players in this list. more of the funds outperformed peers. And in They have seasoned managers who invest heavily five out of six lists, a majority outperformed their in their funds, among the lowest costs for actively benchmarks. Of course, there are no guarantees managed funds sold by brokers, and the depth that this list will match the prior lists’ performance. and skill to outperform their benchmarks. I used the A shares because they are the most widely held by The Terrific 28 Morningstar FundInvestor May 2019

individual investors. American’s No Transaction Fee Gold ratings. Bronze-rated Baird MidCap BMDIX is share class is F1, and those are typically 5-10 basis a cheaply priced growth fund that’s worth a look, too. points higher than the A shares, so fewer would make the cut if I used F1. On the other hand, the firm’s Dodge & Cox institutional and clean share classes would have Dodge & Cox Income DODIX and Dodge & Cox Stock gotten more funds through the tests. Most individual DODGX are long-standing and very welcome members investors can’t tap those share classes, but they are of the Terrific 28. Dodge has just about everything you an excellent choice for those who can. look for in a fund company. Great people come to the firm to make a career of their time at Dodge. The American has a number of portfolio managers oper- firm offers funds that are cheap from their first day, ating independently, running separate focused sleeves and the firm requires that its ownership be kept in the of the fund. All of them follow the prospectus reli- hands of active employees so that there’s stability giously, but each has a slightly different strategy so and sufficient incentives for talented investors to stay. that you get a blend of different styles. In addition, Dodge & Cox Income is a well-run bond fund with a the firm hands over a portion of the fund to its analysts focus on corporate bonds and mortgages, and Dodge who put their best names in the fund, provided those & Cox Stock is a classic value fund. names fit the fund’s guidelines. It’s a formula for long- term success rather than big single-year gains. Fidelity It’s an eclectic trio of funds that made the list from From the growth side of the Morningstar Style Box, Fidelity. Fidelity Diversified International FDIVX American Funds AMCAP AMCPX, American Funds is a rather quiet but effective fund under Bill Bower. Growth Fund of America AGTHX, and American It has a little too much in value to look good against Funds New Perspective ANWPX passed the tests. growth funds in this environment but ought to The first two are U.S.-focused, and the latter is a look better when the pendulum swings back to value. world-stock fund. All three have at least one manager Fidelity Low-Priced Stock FLPSX is the same great, with more than 20 years at the helm and an impres- unwieldy, shockingly good fund that it’s always been sive track record over that span to boot. under Joel Tillinghast. Although it is officially a midcap fund, it has a wide-ranging portfolio that covers From the value side, there’s American Funds American most of the value and blend parts of the style box. Mutual AMRMX, American Funds Capital Income Builder CAIBX, and American Funds Capital World Fidelity Select Health Care FSPHX was given an Growth & Income CWGIX. Their scope and asset-class elevated Silver rating after we visited in 2017 and orientation differ, but all three focus on income, were impressed by the deep and smart team especially dividends—an area that Capital Group has supporting the fund (and Fidelity’s other equity funds handled well for a long time. They aim for solid yields that invest in healthcare.) The fund has put up but sensibly don’t stretch to the point where they have strong results since Eddie Yoon took over in 2008. too much risk or too little appreciation. Harbor Baird Harbor Capital Appreciation HACAX is Harbor’s Talk about a change of pace. Now we’re on to a rela- sole entry. The fund is run by a deep team at tively small Milwaukee boutique that keeps costs low Jennison that is adept at picking stocks in the and avoids big risks. Most of the firm’s assets reside tech and healthcare spheres. with the fixed-income team, which runs rather con- servative funds that typically hold up nicely when LSV credit or interest-rate risk get zapped. With super low LSV Value Equity LVEAX is an excellent quantitative expenses of 0.30%, Baird Aggregate Bond BAGIX and fund run with the help of a number of finance Ph.D.s Baird Core Plus Bond BCOIX were recently raised to The Terrific 28 Morningstar FundInvestor May 2019

Morningstar Morningstar Manager Tenure Cumulative Benchmark Return Prospectus Net The Terrific 28 Ticker Analyst Rating Category (Longest), Yr. PM Return % Cumulative % Expense Ratio, %

American Funds AMCAP AMCPX Œ Large Growth 22.9 780 558 0.68 American Funds American Mutual AMRMX Œ Large Value 13.3 183 154 0.57 American Funds Capital Income Bldr CAIBX • World Allocation 27.3 780 482 0.58 American Funds Capital World Gr&Inc CWGIX Œ World Large Stock 26.1 1,210 573 0.76 American Funds Growth Fund of Amer AGTHX ´ Large Growth 25.4 1,300 913 0.62 American Funds New Perspective ANWPX Œ World Large Stock 18.3 312 157 0.75 Baird Aggregate Bond BAGIX Œ Intermediate-Term Bond 18.6 155 135 0.30 Baird Core Plus Bond BCOIX Œ Intermediate-Term Bond 18.6 178 135 0.30 Baird MidCap BMDIX ´ Mid-Cap Growth 18.3 299 259 0.84 Dodge & Cox Income DODIX Œ Intermediate-Term Bond 30.3 597 504 0.43 Dodge & Cox Stock DODGX Œ Large Value 27.3 1,799 1,206 0.52 Fidelity Diversified International FDIVX ´ Foreign Large Growth 18.0 206 168 0.81 Fidelity Low-Priced Stock FLPSX • Mid-Cap Value 29.3 3,725 2,165 0.62 Fidelity Select Health Care FSPHX • Health 10.5 344 255 0.73 Harbor Capital Appreciation HACAX • Large Growth 28.9 2,315 1,505 0.66 LSV Value Equity LSVEX • Large Value 20.1 383 270 0.64 C Seafarer Overseas Gr and Income SFGIX • Diversified Emerging Mkts 7.2 48 24 0.97 C T. Rowe Price Mid-Cap Growth RPMGX Œ Mid-Cap Growth 26.8 3,067 1,289 0.76 C T. Rowe Price Mid-Cap Value TRMCX Œ Mid-Cap Value 18.3 478 415 0.79 C Vanguard Dividend Growth VDIGX Œ Large Blend 13.2 239 201 0.26 Vanguard Energy VGENX • Equity Energy 6.9 19 18 0.38 Vanguard Equity-Income VEIPX • Large Value 15.3 271 218 0.27 Vanguard Explorer VEXPX ´ Small Growth 25.2 963 515 0.46 C Vanguard PRIMECAP VPMAX Œ Large Growth 33.8 6,954 3,139 0.31 C Vanguard PRIMECAP Core VPCCX Œ Large Blend 14.3 330 238 0.46 Vanguard Selected Value VASVX • Mid-Cap Value 20.1 563 529 0.36 Vanguard Wellesley Income VWINX Œ Allocation—30% to 50% Equity 12.3 119 85 0.23 Vanguard Wellington VWELX Œ Allocation—50% to 70% Equity 16.3 293 231 0.25 Data as of March 2019. C = closed to new investors

who work to steadily improve the models running Mid-Cap Growth RPMGX are excellent funds with the fund. great managers.

Seafarer Vanguard Seafarer Overseas Growth and Income SFGIX has Vanguard had nine funds that made it through my proved to be a real standout in Andrew Foster’s gantlet. When you pair low costs and great sub- seven years at the helm. The Silver-rated fund is advisors like Primecap and Wellington, you have closed to new investors. a great shot at success. All the Gold-rated Vanguard funds in the Terrific 28 are run by Primecap or T. Rowe Price Wellington. The Gold-rated funds on this list are Darn, how is T. Rowe down to just two funds on this particularly compelling. Vanguard Wellesley list? Henry Ellenbogen’s departure from T. Rowe Income VWINX and Vanguard Wellington VWELX Price New Horizons PRNHX knocked that fund out of are great Wellington-run allocation funds. Albeit the box, and T. Rowe Price Capital Appreciation’s closed to new investors, Vanguard Dividend Growth PRWCX expense ratio is just a hair above the cutoff. VDIGX, Vanguard Primecap VPMAX, and Vanguard Two closed mid-cap funds are all that’s left. T. Rowe Primecap Core VPCCX are outstanding. K Price Mid-Cap Value TRMCX and T. Rowe Price Contact Russel Kinnel at [email protected] The Terrific 28 Morningstar FundInvestor May 2019

Disclosures as of March 31, 2019

Analyst Rating is the summary expression of Morningstar's forward- The average annual total returns for the Institutional Class of the looking analysis of a fund. Morningstar analysts assign the ratings Baird MidCap Fund as of March 31, 2019 are 11.65% for the one- on a five-tier scale with three positive ratings of Gold, Silver, and year, 9.13% for the five-year and 16.87% for the ten-year periods Bronze, a Neutral rating, and a Negative rating. The Analyst Rating and 7.73% since its December 29, 2000, inception date. The is based on the analyst's conviction in the fund's ability to outper- average annual total returns for the Russell Midcap Growth Index form its peer group and/or relevant benchmark on a risk- adjusted as of March 31, 2019 are 11.51% for the one-year, 10.89% for basis over the long term. If a fund receives a positive rating of Gold, the five-year and 17.60% for the ten-year periods and 7.26% since Silver, or Bronze, it means Morningstar analysts think highly of the the fund’s inception. fund and expect it to outperform over a full market cycle of at least five years. The Analyst Rating is not a market call, and it is not The fund has a minimum initial investment of $25,000 and a 0.84% meant to replace investors' due-diligence process. It cannot assess expense ratio. The fund is categorized as Mid-Cap Growth by whether a fund is the right fit for a particular portfolio and risk Morningstar. This category contains 555, 495 and 352 funds over tolerance. Morningstar evaluates funds based on five key pillars- three, five and ten year time periods, respectively. -Process, Performance, People, Parent, and Price. Analysts assign a rating of Positive, Neutral, or Negative to each pillar. Analyst Rating Performance data quoted represents past performance. Past Scale - Gold: Best-of-breed fund that distinguishes itself across the performance does not guarantee future results. Investment five pillars and has garnered the analysts' highest level of convic- return and principal value of an investment in the fund will tion. Silver: Fund with advantages that outweigh the disadvantages fluctuate so that an investor’s shares when redeemed may be across the five pillars and with sufficient level of analyst conviction worth more or less than their original cost. The fund’s current to warrant a positive rating. Bronze: Fund with notable advantages performance may be lower or higher than the performance data across several, but perhaps not all, of the five pillars. quoted. For performance current to the most recent month-end, please visit bairdfunds.com. The average annual total returns for the Institutional Class of the Baird Aggregate Bond Fund as of March 31, 2019 are 4.59% Carefully consider a fund’s investment objectives, risks, for the one-year, 3.13% for the five-year, 5.18% for the ten-year charges, and expenses befor einvesting. For a current periods and 5.23% since its September 29, 2000 inception prospectus and summary prospectus, containing this and date. The average annual total returns for the Bloomberg Barclays other information, visit bairdfunds.com. Read it carefully U.S. Aggregate Bond Index as of March 31, 2019 are 4.48% before investing. for the one-year, 2.74% for the five-year and 3.77% for the ten-year periods and 4.75% since the fund’s inception.

The average annual total returns for the Institutional Class of the Baird Core Plus Bond Fund as of March 31, 2019 are 4.63% for the one-year, 3.35% for the five-year, 5.78% for the ten-year periods and 5.71% since its September 29, 2000, inception date. The average annual total returns for the Barclays US Universal Bond Index as of March 31, 2019 are 4.53% for the one-year, 3.00% for the five-year and 4.36% for the ten-year periods and 5.01% since the fund’s inception.

Both funds have a minimum initial investment of $25,000 and a 0.30% expense ratio. Both funds are categorized as Intermediate- Term Bond by Morningstar. This category contains 901, 769 and 564 funds over three, five and ten year time periods, respectively. The Terrific 28 Morningstar FundInvestor May 2019

Morningstar Analyst RatingTM for Funds The test was run using returns through July 2018. Glossary The Morningstar Analyst Rating™ is not a credit or risk Using these ten screens, the tool filtered 28 out of more rating. It is a subjective evaluation performed by than 8,000 mutual funds. Morningstar’s manager research group, which consists of various Morningstar, Inc. subsidiaries (“Manager Morningstar Manager Return Research Group”). In the United States, that subsidiary A fund’s annualized return from the start date (the first day Reprinted by permission of Morningstar, is Morningstar Research Services LLC, which is of the month shown) of the longest tenured manager. Inc. ©2019 Morningstar, Inc. All Rights Reserved. The information registered with and governed by the U.S. Securities and contained herein: (1) is proprietary Exchange Commission. The Manager Research Group Morningstar Parent Rating to Morningstar and/or its content evaluates funds based on five key pillars, which are process, An assessment of the parent organization. Key (operational) providers; (2) may not be copied or distributed; (3) does not constitute performance, people, parent, and price. The Manager areas of evaluating a parent organization include: investment advice offered by Research Group uses this five pillar evaluation to determine recruitment and retention of talent, organizational structure, Morningstar; and (4) is not warranted how they believe funds are likely to perform relative capacity management, organizational and business to be accurate, complete or timely. Neither Morningstar nor its content to a benchmark, or in the case of exchange-traded funds strategy, alignment of interests with fund investors and providers are responsible for any and index mutual funds, a relevant peer group, over regulatory compliance. damages or losses arising from any the long term on a risk-adjusted basis. They consider quan- use of this information. Past performance is no guarantee of titative and qualitative factors in their research, and the Morningstar Risk future results. weight of each pillar may vary. The Analyst Rating scale is An assessment of the variations in a fund’s monthly returns, Gold, Silver, Bronze, Neutral, and Negative. A Morningstar with an emphasis on downward variation. It is calculated Analyst Rating of Gold, Silver, or Bronze reflects the as the difference between Morningstar Return (adjusted for Manager Research Group’s conviction in a fund’s prospects loads and excess over the risk-free rate) and Morningstar for outperformance. Analyst Ratings ultimately reflect Risk-Adjusted Return (adjusted for loads, excess over the the Manager Research Group’s overall assessment, are risk-free rate and risk). Morningstar Risk is similar to (and overseen by an Analyst Rating Committee, and are correlated with) standard deviation; the key difference is continuously monitored and reevaluated at least every 14 that standard deviation gives the same weight to upside months. For more detailed information about Morningstar’s and downside variation. Morningstar Risk is measured for Analyst Rating, including its methodology, please up to three periods (three, five and 10 years). go to global.morningstar.com/managerdisclosures/. For each period, all funds in a category are ranked by The Morningstar Analyst Rating (i) should not be used as Morningstar Risk. The top 10% are given a risk score the sole basis in evaluating a fund, (ii) involves unknown of 5, or “High”; the next 22.5% are scored 4, or risks and uncertainties which may cause Analyst expec- “Above Average”; the next 35% are scored 3, or “Average”; tations not to occur or to differ significantly from what the next 22.5% are scored 2, or “Below Average”; they expected, and (iii) should not be considered an offer the bottom 10% are scored 1, or “Low.” or solicitation to buy or sell the fund.

Morningstar FundInvestor In this analysis, Morningstar evaluates funds based on a set of screens established by Russel Kinnel, Director of Manager Research and editor. As listed on p. 1 of the article, the screens applied are as follows: (1) Expenses must be in the cheapest quintile of the category; (2) manager investment in the fund must be more than $1,000,000; (3) the Morningstar Risk rating must be below the High level; (4) the fund must be a “medalist”– i.e., it must be rated Bronze, Silver or Gold; (5) Parent Rating must be positive; (6) the fund must have outperformed its prospectus benchmark over the tenure of the longest tenured manager. A minimum of five years is required; (7) category benchmarks or averages used for allocation categories; (8) no institutional share classes; (9) no fund of funds.

Figures shown are past results for Class A shares and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Share prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. Fund results are for Class A shares and reflect deduction of the 5.75% maximum sales charge. For current information and month-end results, visit capitalgroup.com.

Results as of September 30, 2019 Fund Inception date Total returns (%) Expense ratio (%) 1 Year 5 Years 10 Years Lifetime AMCAP Fund® 5/1/67 –8.31 7.83 11.78 11.28 0.66 The Growth Fund of America® 12/1/73 –7.87 9.32 11.71 13.25 0.62 New Perspective Fund® 3/13/73 –3.35 8.09 9.67 11.96 0.75 American Mutual Fund® 2/21/50 –0.14 7.95 10.97 11.47 0.57 Capital World Growth and Income Fund® 3/26/93 –4.53 4.72 7.28 9.94 0.76 Capital Income Builder® 7/30/87 –0.97 3.22 6.26 8.73 0.58

Investment results assume all distributions are reinvested and reflect applicable fees and expenses. Returns greater than one year were annualized. Expense ratios are as of each fund's prospectus available at the time of publication. When applicable,,investment results reflect fee waivers and/or expense reimbursements,,without which results would have been lower. Please see capitalgroup.com for more information. Investing outside the United States involves risks such as currency fluctuations,, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. If used after December 31,,2019, this article must be accompanied by a current American Funds quarterly statistical update. Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. This content,,developed by Capital Group, home of American Funds,,should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice. All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies. American Funds Distributors, Inc.,,member FINRA.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.